Does Bankruptcy Hurt My Auto Loan Chances?

If you are thinking about filing or have recently declared bankruptcy, you may be wondering if it hurts your chances of securing an auto loan to purchase a vehicle. While your ability to borrow may be affected after bankruptcy, the filing doesn’t guarantee automatic rejection when it comes to financing.

Learn more about getting an auto loan after bankruptcy, including how the bankruptcy process works and how it affects your credit. You’ll also need to know what you can do to improve your chances of loan approval after filing.

What is Bankruptcy?

Bankruptcy is a legal procedure that pays your debts by liquidating your assets. The appeal of bankruptcy is discharged debt. The process allows you to start over with your finances, rather than struggle under debt that you cannot pay. In the U.S., 473,349 people filed for bankruptcy between March 31, 2020, to March 31, 2021, to relieve crushing debt and start over.

The federal court system handles bankruptcy, which is available to individuals, spouses, and business entities. To file bankruptcy, you work with a bankruptcy lawyer who understands the complex rules and regulations of the process. In most cases, you will meet with your lawyer a few times, then await the final decision of the bankruptcy court.

Some forms of bankruptcy discharge your debt outright, while others detail a payment plan for you to eliminate your debts over several years. The two most common types of filing for individuals are Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7

Chapter 7 bankruptcy is generally recognized as the filing that allows you to discharge all debts. You can retain rights to exempt assets during bankruptcy, such as your primary residence, a reliable vehicle, clothing, and other necessities that don’t hold much cash value. Instead of liquidating these assets, the court discharges eligible debts, leaving you free to start over.

Chapter 13

A Chapter 13 bankruptcy is for individuals who make a regular income. This type of bankruptcy allows you to keep your assets up to a point and make regular payments to creditors. While making payments, you are protected from legal actions taken against you. This is a significant benefit of filing under Chapter 13.

How Does Bankruptcy Affect Your Credit?

Initially, bankruptcy adversely affects your credit. Filing can lower your credit score by around 200 points, which affects your ability to get approved for auto financing in the future.

A Chapter 7 bankruptcy stays on your credit report for ten years, while Chapter 13 remains for seven years. This means that your credit will show your bankruptcy to any financial institution to which you apply for several years after you file.

This negative hit to your credit may be worth it, especially if you cannot make payments on your existing debt. Late or missed payments can be just as devastating as bankruptcy to your credit history, so the better option may be to file to eliminate the debt and start over.

It is also important to consider that you can begin to build your credit back up as time passes after your bankruptcy. If you use the opportunity of bankruptcy to enact healthy financial management, you can recover in a few years.

Can You Obtain Auto Financing After Bankruptcy?

Whether you can obtain auto financing for a car after bankruptcy depends on many facts. These include how long ago you filed, your up-to-date credit history and credit score, the lending institution you apply with, and how much of a down payment you can make.

When you filed

The more time you let pass between filing for bankruptcy and applying for an auto loan, the better. Trying to get a car loan a few months after you discharge your debts will likely end in non-approval. However, if you apply four, five, or six years after your bankruptcy and have worked on rebuilding your credit, you will likely find lenders that will work with you.

Current credit status

Any time you apply for an auto loan, the lender pulls your credit history and credit score. If you’ve done little to build credit after bankruptcy, you may have bad credit, which results in fewer approval options and higher interest rates.

If you’ve put in the work to improve your credit score through using financial counseling services or making on-time payments on a secured personal loan, then you are likely to obtain approval for an auto loan with decent interest rates.

Lending institutions

The institution you apply with also determines whether you can secure financing. In many cases, buy-here-pay-here used car dealerships will offer to finance you, even with bad credit after a bankruptcy. While it may be tempting to take the offer, this type of arrangement can result in you paying higher fees and incurring unnecessary debt as you try to recover from bankruptcy.

Traditional banks have strict requirements when it comes to customer loan approvals. Applying for a loan with a bank may result in a denial, even with good credit.

Your best option is to apply with a lender like T&I Credit Union to provide you with flexible options to meet the needs of your evolving credit situation.

Down payments

When applying at a credit union like T&I, saving for a down payment on a car is wise. You are more likely to receive approval for the auto loan if you can put down money upfront. This allows you to take out a smaller loan amount, minimizing the risk to the lender and bettering your chances of approval.

Base your down payment amount on what the car is worth. Try to put down at least 10% on a used car and 20% or more on a new car.

bankruptcy affects on Credit Score

How to Rebuild Your Credit

There are several ways to rebuild your credit after filing for bankruptcy. Consider taking the following actions to improve your credit score slowly.

Take out a secured loan

It may seem counterintuitive, but taking out a secured loan as an intentional way to rebuild credit can work to improve your score. A secured personal loan is a line of credit that is backed by a CD or savings account. T&I Credit Union may work with you on a secure loan approval under the right circumstances.

With a secured loan, you can make consistent monthly payments and rebuild your credit score. Additionally, by working with T&I for your personal loan, you establish a relationship that can help you obtain an auto loan sometime down the road.

Keep an eye on your credit report

When rebuilding your credit, you must keep an eye on your credit report to ensure that no reporting errors are made. Check your credit report and credit score every few months to see how things are improving as you make monthly payments and develop your credit. Dispute any incorrect information so that it doesn’t adversely affect your financial recovery.

Decrease credit usage

During your bankruptcy, any credit cards or lines of credit you had were discharged. This puts you in an excellent space to limit your credit usage in the future and decrease your debt-to-income ratio, which negatively affects your credit score.

While taking out one purposeful secured personal loan or line of credit can help build your credit back up, do not use it to increase your credit usage. For instance, do not charge more than you can afford to pay off each month and don’t take out a loan amount you’ll struggle to make payments on.

As long as you pay off the balance every month or make on-time payments on your secured loan, your debt-to-income ratio should remain low, which boosts your credit.

Avoid new debt

Other than an intentional line of credit with a trusted financial lender, avoid taking on any new debt post-bankruptcy. While you may receive offers for credit cards or feel tempted to use short-term loans online to pay for items you want to buy, avoid these offers.

They likely carry high-interest rates and will keep you trapped in the cycle of spending more than you can pay, leaving you back where you started before bankruptcy and unable to obtain an auto loan when necessary.

Explore Auto Loan Possibilities at T&I Credit Union

If you are searching for an auto loan after bankruptcy, speak to a loan representative with T&I Credit Union today. We can provide you with further information about receiving approval for a vehicle loan after filing for bankruptcy. One of our representatives can also walk you through the pre-approval process to determine if you might be approved for an auto loan.

Contact us at (248) 588-6688 to discuss your financial situation and find out if T&I Credit Union can help.

About Lynn Mayfield

Lynn Mayfield studied business at the University of Kansas and enjoys analyzing new economic trends and how they affect the banking industry’s future. Lynn has worked in loan processing and freelance writing. She enjoys traveling in her free time.

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